Paul Mifsud, the Netherlands and the brave new world of Open Skies

The following remarks were delivered in Washington DC June 25 by IATA General Counsel Jeffrey N. Shane at the 2015 L. Welch Pogue Lifetime Achievement in Aviation Award dinner. This year’s Award recipient is Paul Mifsud.

Good evening, everyone. It’s a privilege to be able to join in honoring Paul Mifsud tonight for his cutting-edge creativity and for his lifetime of service to the international aviation community.

I’m very pleased to see so many of my colleagues here tonight at the IATA table. By the way, Doug Lavin asked me to mention that if you happen to be in the market for a new carry-on suitcase, he has some really, really small ones that he’ll let you have for a very nice price.

I was flying out of Dulles last week. There are some marvelous, old black-and-white photographs on display there showing the airport at various stages of construction. There’s also a wonderful photo of the interior of the new terminal in 1964, taken shortly after the airport was up and running.

Everyone in that photograph is dressed to the nines. The men are in suits and even hats; the women look like they’re going out for the evening. It reminded me that flying was a pretty special way to travel back in the day. You suited up for it.

And the price you paid for the ticket was a price agreed to by the airlines at an IATA meeting. That sounds as though IATA must have been some evil cartel, but the truth was that at the time all governments – including the US government – depended on IATA to come up with agreed fares. IATA enjoyed antitrust immunity to facilitate the activity. After all, how could government regulators figure out what the price of air transportation should be in the thousands of city-pair markets around the world?

It would be another decade and a half until the Airline Deregulation Act would be passed and President Carter would launch the US on a campaign to introduce elements of deregulation into international markets. It would be nearly 30 years until the US announced an Open Skies policy.

In other words, it would be a long time before governments figured out that they could simply get out of the way, allow airlines to compete, and let the market decide what the appropriate price of an airline ticket should be.

Now that deregulation, liberalization, and even Open Skies are default policies for aviation in so much of the world, it’s easy to forget what a revolution in public policy these developments represented. Even those of us who lived through the transition have difficulty remembering how crazy it used to be.

I worry, when I talk about this history, that people will look at me as though I’m the last living Civil War veteran. But I’ll continue.

There was no better example of the craziness we were living with back then than the bilateral aviation relationship between the US and the Netherlands. Here were two governments that shared a deep-seated commitment to free trade as the best means of bettering the lot of peoples everywhere. Paradoxically, however, our bilateral aviation relationship was conducted pursuant to very different assumptions, at least on the US side.

Now I don’t want our Dutch friends to take this the wrong way, but Holland is – how do I put this? -- a small country compared to the US. I mean geographically. It’s not their fault; it’s just true. And that gave US airlines some arguments against allowing KLM to expand its services into the US that had a lot of political appeal.

How many gateways are there in the Netherlands anyway? One? Two? Then why, US airlines asked, should we give them more than one or two in the US? Where did most KLM passengers start their trips – in Holland or in other countries? Aren’t most of the passengers American? Then why should they be carried by a foreign carrier? On and on.

The Dutch, of course, were actually among the first to liberalize access to and through their territory for any and all U.S. airlines, with no limits on capacity or schedules and no regulation of air fares. Early on, in other words, they gave us all they had to give. In return, the US awarded KLM half a dozen new destinations in the US. There was an immediate firestorm of protest by US airlines. We had given KLM “hard rights” – new cities to fly to in the US – in return for nothing more than “soft rights” – a willingness by the Dutch government to stop regulating airfares and capacity. “No hard rights for soft rights!” became one of most incomprehensible battle cries in the annals of American lobbying.

Paul Mifsud was KLM’s principal US-based advocate at this time. He made it his mission to ensure that no US aviation official was ever allowed to forget the extent to which US policy toward air services between the US and Holland contradicted our larger policy toward trade in general.

We had lots of negotiations with delegations from Amsterdam during the 1980s and early 1990s, and they occasionally became pretty testy. Noting that so much of KLM’s traffic to the US originated in countries other than Holland – so-called “sixth-freedom” traffic – I once actually asked the Dutch side why KLM didn’t adopt the skull-and-crossbones as its new logo.

During another round in 1990, the Dutch delegation offered to allow any and all US airlines the opportunity to make Amsterdam a new hub for their expanding international operations. It was a novel idea, to be sure, but since most other countries would have blocked US airlines from originating flights at Amsterdam, it didn’t get us very far.

After that round ended Paul sent me a letter expressing his unhappiness that the talks had yet again come to naught. I couldn’t find a copy of his letter, but I did find a copy of my reply. I wrote: “Dear Paul: Thanks for your letter . . . expressing your usual disappointment that the last round of US Dutch talks failed to revolutionize international aviation.” I then expressed my disagreement with his likening the US-Dutch relationship to “lions and mice.” Finally, I closed the letter with a poem. I thought it was pretty good and so now, 25 years later, I will read it publicly for the first time:

KLM offered to give us a hub;

Understand it? We certainly tried to.

Our carriers said there was only one rub:

To hub, you need someplace to fly to.

Of course, at the very same time Paul and I were exchanging snarky letters and bad poetry, DOT, then led by a great Secretary of Transportation, Samuel Skinner, was busily blowing up the traditional US approach to international aviation.

First we launched a new so-called “cities program” in which we offered to give foreign airlines access to unserved US cities without the need to negotiate a new bilateral agreement. You can probably guess the identity of the first foreign airline to take advantage of this new opportunity: Yes, it was KLM. They started a new daily 747 service to BWI without any bilateral talks whatsoever.

Then, following an administrative proceeding, DOT announced a new Open Skies policy for the US. Any country willing to open its market to US carriers would get open access for its carriers to the US, and beyond to the rest of the world. We no longer cared whether you were a large country or small, how many airports you had, whose citizens the passengers were, or where they started their trips. It was a radical departure.

And you can probably guess the identity of the first country to sign an Open Skies agreement with the US: yes, it was the Netherlands.

We in government were proud of this major breakthrough, but we hadn’t anticipated all that it might lead to. Even before the ink was dry on the new agreement, KLM, led by Paul, came to DOT with an even more radical idea. KLM and its partner airline, Northwest, felt that they could become a far more efficient global competitor if they were permitted to integrate their operations more completely. To do that, they said, they would have to have antitrust immunity. DOT clearly had the authority to grant ATI, as we learned to call it – remember the immunity granted to IATA price-fixing for all those years – but nobody had ever proposed that DOT grant immunity to an airline joint venture before.

Well, you all know the outcome. I approved ATI for KLM and Northwest as my last official act in January 1993 before handing the keys to my office over to the Clinton Administration. I think it’s fair to say that the combination of Open Skies and antitrust immunity for alliances has facilitated a wholesale restructuring of international aviation just about everywhere. It brought the dream of a truly globalized industry much closer to reality.

Paul, through your perseverance, your tenacity, and your creativity, you were in so many ways a principal author of that revolution. We are all in your debt. And that’s why tonight’s recognition is so richly deserved.

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